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GM to ditch Isuzu

2006-03-30 09:35

Yuka Obayashi & Osamu Tsukimori

US auto giant General Motors said on Thursday it is discussing selling its stake in Japanese truck maker Isuzu Motors Ltd., another step in its restructuring to cope with heavy losses.

GM's sale of most of its stake in Japanese car maker Suzuki earlier this month for much-needed cash had raised speculation of a sale of its Isuzu holdings. Last year GM sold its entire 20 percent stake in another Japanese auto maker, Fuji Heavy Industries.

The Detroit-based auto maker lost $10.6 billion in 2005 as it faced high labour and commodities costs, loss of U.S. market share to foreign rivals and sluggish sales of sport-utility vehicles - typically its largest profit generators.

"The cash which GM would receive from the transaction will be some help," said Tatsuya Mizuno, director at Fitch Ratings.

"But the gain will be relatively small and the deal may not be good value for GM from the perspective of its strategy for the Japanese market and its truck business, as the deal will weaken the (Isuzu) relationship," he said.

GM currently holds about 90 million shares, or 7.9 percent, in Isuzu, worth some 38 billion yen ($320 million) based on Isuzu's closing price on Wednesday.

GM and Isuzu, which first formed an equity alliance in 1971, said any sale would have no effect on their alliance.

GM buys nearly 200 billion yen's worth of diesel engines and other parts from Isuzu annually, and sales to GM accounted for 18 percent of Isuzu's total revenues in the year ended March 2005.

Analysts said any sale could result in GM reducing its stakes in their two joint ventures in the United States and Poland. Currently GM holds a 60 percent stake in the two diesel engine ventures while Isuzu has the rest.

Trading firms may buy

GM said it is discussing the possible sale in a private transaction, but Japanese trading houses Mitsubishi Corp. and Itochu Corp. said they had received requests to buy GM's holdings in Isuzu.

Spokesmen for Mitsubishi and Itochu said they were considering the GM request but nothing had been decided yet.

Mitsubishi sells Isuzu trucks in Thailand and Itochu sells them in North America. Mitsubishi currently holds a 0.2 percent stake in Isuzu, while Itochu holds 0.7 percent. Both firms also own preferred shares in Isuzu.

The trading houses are targetting an expansion of their highly profitable auto businesses, said Shinji Kitayama, analyst at Shinko Securities.

But Fitch's Mizuno said Isuzu will need to seek another partner among auto makers.

"Trading houses are just sellers of its products," he said.

"To maintain strong presence in the longer run, Isuzu has to form a solid alliance with a strategic partner to work together in technology, procurement and research and development."

Isuzu's advanced diesel technology and market presence in Japan could attract some domestic or foreign firms, he added.

World No.2 truck maker Volvo AB said last week it had bought a 13 percent stake in Nissan Diesel for about $195 million to strengthen its Asian operations.

Isuzu said it has agreed to discuss the sale of GM's stake at GM's request and that it understands GM's need to strengthen its balance sheet and liquidity.

"We recognise GM is at a crucial point in turning its North American business to profit, and is continuously reviewing its portfolio," Isuzu said in a statement.

Shares in Isuzu rose 3.05 percent to 439 yen after the news, which was first reported in the Nihon Keizai business daily.

The news generated optimism that Isuzu would be better off after cutting its ties with the struggling auto maker, said Ken Masuda, senior dealer in equities at Shinko Securities.

"You have to think of this as a plus ... General Motors is not doing well at the moment," he said.

Backed by earnings recovery in the recent years, shares in Isuzu have risen nearly 12-fold since December 2002 when GM injected 10 billion yen into Isuzu.

A spokesman for Mizuho Corporate Bank, which holds a 2.8 percent stake in Isuzu, also said it had received a request to buy GM's Isuzu holdings, and was considering it. Mizuho Corporate Bank is part of Mizuho Financial Group

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